Jobs, Character Proxies, Credit Scores, and “Counterparty Risk”

credit-reportTo everyone waiting for part 2 of the Resume SEO post, I have to apologize…. It will be coming soon, but a different topic grabbed my fancy a few days back when a friend of mine wasn’t hired for a job because, she believes, her credit score was in the dumpster.

Have you noticed that most times that you are going through the final stages of a job application, they give you a bunch of paper-work to fill-out? In that paper-work more often than not is a form authorizing your future employer to run your credit report and history? Ever ask yourself “why?”

Before I get into using credit scores in hiring I would like to share a slightly unrelated story.  I recently bought a new (used) car. You can find your qualified car dealer from Motor Lender and if your in sweden make sure to check the senaste nyheterna om lån i Sverige 2019 which can help you get the best deals for your investment. I got financing and the bank ran my credit-report for the loan (this makes sense, as my credit report says how likely I am to pay back a loan).  What’s interesting is that my new insurance company ran my credit report as well. This puzzled me, I have a good driving record (except for one speeding tkt. for going 61 in a 55), I’m over 25 and otherwise do not fall into any high risk categories. So why the credit check? … what does my ability to pay back no credit check loans have to do with auto insurance? The guy form the insurance company didn’t know when I asked him, he said it was just policy and that if I had a low score I could be denied insurance or might have to pay higher premiums. I got to thinking, and did some on-line snooping with little success. Then it dawned on me. In banking there is a concept of “Counterparty Risk” – basically this is the possibility that the person that you are dealing with stops doing the things that they promised to do. Visit OnQFinancial’s website for more details.

For example let’s say you made a deal with your neighbor to shovel his driveway after snow, and he, in turn, promised to pick up your leaves in the fall, but fell sick and wasn’t able to do it. Well, that’s the risk you take, so to mitigate that risk you would assess your neighbors health before entering that deal, and negotiate the terms before-hand based on the information you find about him. In this case, however, you don’t have access to your neighbors  health (this information is protected by law), what you do have access to is his credit score, and credit score is somewhat correlated with health. So, in this example, credit score is a proxy for health, and getting that information you can determine (to some degree of statistical certainty) how much risk you’re taking on by getting into this deal with your neighbor.

Back to my auto insurance, credit scores, it turns out, are highly correlated with filing a claim (the lower the score, the more likely you are to file an insurance claim), even more so than traffic tickets. So in this case my credit score is what determines how likely I am to have an accident (and file a claim)… statistically speaking.

Now, back to employment (that is the subject of this blog after all). My friend has a credit score of 520 – that’s low. It got that way because she earned a bachelors degree in history, followed by working in a flower shop, followed by being unemployed, followed by having kids… Early on in life, it can sometimes be hard pay the bills.  Luckily she has a wonderful supporting family and parents on both sides, who are retired now and can stay with her daughters during the day. So she started looking for a job to be an office administrator around Boston. This being a tough market it took her months to get any traction, finally a series of good interviews, followed by second interviews, followed by being mailed a packet containing legal forms including a few background check.

She made it, or so she thought. She has no criminal record, no drugs, nothing secret or hidden… all is good. Well… you see where this is going. A week later she gets a call saying that her background check did not come back “positively” (my friend repeating the words of the HR person), and that her job was offered to another candidate. This was devastating and , to her, it was obviously due to her low credit score. Let’s put a discussion of ethics or legality aside, for the purposes of this post. You might want to ask – Why?  How is a person’s history in repaying loans related to their performance in the workplace?

Well just as in the previous examples, industry leaders have spent a lot of money and put a lot of work into statistically analyzing data related to job performance, and they have observed that the credit score is somewhat linked to performance in the workplace (performance in this case means reviews of managers), they don’t really think you will be more likely to steal (there is absolutely no indication that a credit score is related to “trustworthiness”), and they don’t have access to your prior performance reviews. This is the answer to “Why,” credit score is a statistical proxy that legally attainable and actionable.

A credit score is not an indicator of performance, job fit, skills, or abilities, but until employers and candidates embrace the idea that that there are more appropriate tools to directly measure the things that they want to measure for the workplace, they might continue reaching for the low-hanging fruit and use an off-topic indicator (like a credit score) to evaluate a candidates match to a position. My recommendation to anyone hiring or being hired is to use and encourage the use of Cangrade, which is specifically designed to measure the things that you want measured for the workplace, and doesn’t unfairly penalize an ever growing number of  people affected by a poor economy (or by things such as medical bills, student loans, and many others).

  2 comments

  1. ggoren ggoren   •  

    Wow, this is really interesting! I didn’t know that credit score can be a factor in a job application. Damn, I hope I will not have to look for a job any time soon! 🙂

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